Recently, ratings agency Fitch warned about the increasing possibility of RMB bond defaults in 2019. BNPP Asset Management is also cautious on onshore Chinese corporate bonds.
“On the onshore side, we expect some additional spread widening, which means more defaults,” Jean Charles Sambor, the firm’s London-based deputy head for emerging market fixed income, told FSA.
“That is why we are really not active in the Chinese onshore market on the corporate side.
“But we don’t think it as a negative, we think it is healthy. It is good that policymakers are allowing more defaults because for years they have been preventing this, which is not good for a price discovery mechanism.”
Last year, China onshore bond defaults reached a record high of around RMB 84.3bn ($12.53bn), driven by companies’ poor liquidity, according to a Moody’s report.
“Risk aversion [among investors], combined with higher funding costs and limited access to alternative funding channels makes it challenging for weaker companies to refinance,” Nino Sui, a senior analyst at Moody’s, said in the report.
Cheap offshore high yield
Sambor believes that offshore high yield bonds offer the same credit risk as US high yield, but with better valuations.
“China high yield is very cheap compared to US and even global high yield.”
He particularly likes the offshore high yield bonds of property developers because the sector is expected to be resilient against the trade tensions between the US and China.
“If you expect trade tensions to increase, policymakers in China will be more accommodative to make sure that domestic demand for property in China to continue to do well. Of course, that means we are cautious of the export sector,” he said.
Other fund managers have also warmed to Chinese property issuers, including Insight Investment and Allianz Global Investors.
Separately, Sambor added that the firm’s plan to hire onshore investment analysts in China is still on track.
“We want to have onshore staff in Shanghai, but we don’t have a clear timeline on that.”
Sambor, together with Bryan Carter, London-based head of emerging market fixed income, joined the firm in 2016 to centralise its global emerging market (GEM) capabilities. According to Sambor, since then, assets in emerging market fixed income strategies, which include three flagship funds, have grown to $5bn from $1bn.
The GEM fixed income team now has 17 people, including a Singapore-based portfolio manager, and two analysts and a client portfolio manager in Hong Kong.